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Delivering Energy Security

I feel stupid, and I am angry. The stupidity is collective; the anger is personal. I am angry because I …

I feel stupid, and I am angry. The stupidity is collective; the anger is personal. I am angry because I feel stupid and the reason is oil. Energy, actually, and that’s the point. There is no rational reason why America, with our technology and our wealth, is still so massively dependent on oil for energy.

But we have chosen to cede to others control of our energy, and along with our energy our future, and along with our future, perhaps even our sovereignty. That we’ve chosen by default, not by design, makes the choice no less ours. We are becoming progressively more vulnerable, and we do not seem to mind. Maybe we’re lulled by the slow rate of the erosion of our power. It is as if, to use a World War II analogy, the German Army were advancing slowly across North Africa and the Allies didn’t much care. 

I have some suggestions, but first here’s some background. If you’ve heard it before, hear it again. 

Energy Trends and Risks 

It is the odd consequence of capricious geological history and arbitrary national boundaries that the major industrial regions of the world- the United States, Europe, Japan and China– do not have sufficient domestic energy to meet their voracious and increasing needs. Compounding the problem, the growth of China and India means that energy demand will not naturally diminish. The people of China and India do not deem it fair to freeze current standards of living, as some in the developed world would have them do, and thus memorialize great imbalances between countries. China and India argue that they are perfectly ready to limit future increases in energy consumption once their per capita energy consumption reaches that of developed countries. 

So with energy demand ever increasing and supply ever decreasing, and becoming more concentrated, both prices and vulnerabilities are ever rising. As such, for America, the ready and reliable supply of energy is a diminishing national strategic resource, and securing and protecting energy is an accreting national security problem. 

Energy risks are at least threefold: risk of sourcing (confidence in the reliability and continuity of foreign sources), risk of transport (dangers lurking in the movement of energy over thousands of miles), and risk of pricing (uncertainty in costs of energy and factors that affect costs). In today’s world, energy and oil are as much national security issues as are sovereignty and borders. 

America’s reliance on imported oil is now an issue of national security, especially with much of the oil coming from the Middle East and with most sources of oil in countries considered unstable or unfriendly or both. 

Energy Strategies 

America‘s security is in peril, and it is time for dramatic policies. We must reverse our drift toward debilitating dependency. We formulate three energy strategies, but these strategies are all obvious and formulation alone bears no weight. Implementation is everything. What are the carrots and sticks needed to convert theory into practice? 

First, we must set energy efficiency as a prime national directive. Not a suggestion. A directive. Saving energy and instituting sustainable development must be implemented in every use of energy in industrial and consumer consumption.

Second, we must accelerate development of alternative energy, with concentrated efforts-no, with monomaniacal intensity! Wind, solar, nuclear, hydro and biofuels must all be pursued vigorously. 

Third, we must make the development of clean coal technologies a national priority. Coal accounts for about 25 percent of our energy; we have ample domestic coal reserves; and if coal could be made clean, it could have a major impact. 

How do we implement these strategies? America has the greatest R&D engine in the world. First, the private sector must be motivated. There is only one mechanism for effective motivation: tax policies that are aggressive, integrated and enforced. If you want people to pay attention, touch their wallet. If you want companies to pay attention, squeeze their P&Ls. Tax credits and penalties, enticing and punitive respectively, must be structured for each of these strategies. 

The public sector has a role to play; I think a significant one. Create a Manhattan-like project, which our wartime government instituted when our national survival depended on making an atomic bomb before our enemies did. If the analogy between current conditions and World War II seems weak, if energy dependence on other countries does not seem as menacing as a mushroom cloud, that is the reason why we are now in decline. The difference between military occupation and energy dependence is one of only method and time. The result is the same: payment of tribute and subservience to others. 

To create a Manhattan-like project, America has a powerful but underutilized resource: our national laboratories and technology centers under the Department of Energy- Lawrence Berkeley, Los Alamos, Sandia, National Energy Technology Laboratory (which focuses on fossil fuels), and National Renewable Energy Laboratory. It’s obvious that budgets must be increased, but in addition, sophisticated management of creative initiatives must be instituted. For example, competitive teams should be established at different laboratories so that radically innovative ideas can be explored in parallel. Risk should be rewarded, not punished. 

Advanced technology combined with decreasing demand for high energy-consuming products-both enhanced by meaningful tax benefits and penalties-can achieve sustainable development and thus energy independence. Such self-sufficiency cannot be achieved rapidly, but the lack of noticeable progress, say within election cycles, must not undermine our unrelenting national resolve. The choice is stark: gradual independence or certain dependence. 

Tax Strategies 

The top of my to-do list is to increase taxes on gasoline-and to do so substantially. Politicians may see this as political suicide, but for our country, it would accomplish three things: 

_ Reduce demand (even though demand will not decrease with simple economic elasticity, raise the price high enough and demand will go down).

_ Encourage the development of alternate energy (which would become more economically viable if the price of gasoline stays sufficiently high).

_ Raise public revenues (which could be spent on developing new technologies). 

In addition, less money would be going out of the U.S., thus reducing balance of payment problems and the insidious funding of unreliable countries. The problem has been that quite irrespective of this logic and wisdom, raising taxes is exceedingly unpopular with U.S. voters, and the U.S. Congress has lacked the will to implement such policies in light of popular protest. 

Cooperation with China 

America should work with China in developing energy research, especially coal, which supplies about 70 percent of China‘s energy, but also oil, nuclear and renewables. Real cooperation faces difficulties in that many Americans see China as solely promoting its own interests and that China‘s resurgence comes at Americans’ expense. Many Chinese believe that the U.S. seeks to contain China‘s emergence, and therefore the U.S. is viewed as a threat to China‘s longterm security. Both countries should get over it and come to see the obvious: Only by cooperation, not competition, can both countries optimize energy resources in every sphere of importance, including in the volatile Middle East. 

Speaking Personally

I still feel stupid, and I am still angry, and to ameliorate both I must be prepared to sacrifice. Here’s a start. 

Raising taxes on gasoline is essential, but raising taxes on gasoline is regressive in that the burden falls disproportionally on lower-income citizens. This is unfair and the solution is subsidies, say in the form of tax credits, to lower-income citizens. How do we pay for these subsidies? Raise my taxes. Raise taxes of all higher income citizens. If my taxes are raised to provide subsidies in order to set a higher tax on gasoline, thus reducing demand and funding new technologies, I am less happy with less money, sure, but I am much happier with a stronger country. By the way, make that tax a surcharge for simplicity and put my name at the top of the list.

Robert Lawrence Kuhn, an international investment banker and corporate strategist, is senior adviser to Citi group. He is co-editor-in-chief of China’s Banking and Financial Markets: The Internal Report of the Chinese Government and author of the No. 1 best-selling book in China in 2005, The Man Who Changed China: The Life and Legacy of Jiang Zemin. Dr. Kuhn’s articles describing and explaining in – vestment banking are posted at www. chiefexecutive.net/investment.

About robert lawrence kuhn

Dr. Robert Lawrence Kuhn is an international corporate strategist, investment banker and expert on China. Since 1989, he has worked with China’s senior leaders and advised the Chinese government on matters of economic policy, industrial policy, mergers and acquisitions, science and technology, media and culture, Sino-U.S. relations, and a variety of international business matters. Dr. Kuhn advises leading multinational companies, CEOs and C-Suite executives, regarding formulating and implementing China strategies in a variety of sectors, including science and technology, energy and resources, industrial, media and entertainment, healthcare / medical / pharmaceuticals, consumer products, and financial services. He works with major Chinese companies on structuring their capital markets financing and M&A activities.